Evidence of meeting #129 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was treaties.
A video is available from Parliament.
Caplin and Drysdale, New York University, School of Law, As an Individual
I did not hear the English translation, but that's okay; I understand French.
Conservative
The Chair Conservative James Rajotte
Oh, okay. Thank you very much. I appreciate that.
We'll begin questions with Mr. Rankin, please, for five minutes.
Colleagues, please direct your questions as best you can. We have five panellists, so if you could direct the questions, it would be very helpful.
Murray Rankin NDP Victoria, BC
Thank you.
Thank you to all of our witnesses for coming on such short notice. It's greatly appreciated.
I want to do a quick summary of what I thought I heard on a couple of key points. Then my questions will be for Ms. Alepin and Mr. Deneault.
I think I understood Mr. Deneault to say that Bill S-17 and the OECD model conventions were essentially inoperative.
Ms. Alepin, you said that you simply do not support Bill S-17, for the reasons you gave.
Mr. Rosenbloom said, talking about the information provisions, that he doesn't see them doing any harm. I would call that the “damning with faint praise” approach.
Essentially there's an opposition to this, as Mr. Cockfield's remark would seem to suggest, because in light of the “explosion”, to use his word, of automatic information exchange and things going on laterally, these seem to be very old-fashioned.
Ms. McLeod used the expression of it being a tool in the tool kit. It would appear to these witnesses to be a pretty dull tool, at best, in going after the problem of tax evasion.
My question is for Ms. Alepin and Monsieur Deneault, and it's about Hong Kong, just so that's clear.
You said, Ms. Alepin, that profits in Hong Kong could be 100% tax-free if subsidiaries set up in Hong Kong or elsewhere were involved. Monsieur Deneault said that non-resident trusts don't have to declare, don't have any information to exchange, because in Hong Kong that information doesn't have to be registered. So essentially, how could one ever obtain information and make this work on tax evasion issues with respect to Hong Kong?
Mr. Cockfield had similar things to say, noting that there's no requirement, that indeed there's no automatic exchange of information possible. I'm just not sure how it would ever work with Hong Kong.
I'd like Ms. Alepin and Monsieur Deneault to talk about how it might be possible to use this agreement, if at all, with respect to Hong Kong, for example, to curb tax evasion.
Chartered Accountant, Tax Expert, Tax Policy Specialist, Author, As an Individual
In terms of the automatic exchange of information, I think my colleagues are in a better position than I am to criticize the terms and conditions of the current convention. Clearly, all the remarks made so far that seek to determine whether it is reasonable to think that the automatic exchange of information would bring tangible results are valid views. That is the case today before this committee and that was also the case before the Senate. It was said that this was a first step, and it probably is a first step.
In my view, what really worries me about Bill S-17 is that companies and very wealthy individuals can now legally avoid paying their fair share of taxes by taking advantage of tax havens. In fact, as with other bills dealing with tax conventions, with Panama in particular and other countries that have lower tax rates than Canada, we are heading towards a global tax system where it is legal for some taxpayers, especially corporations and very wealthy individuals, to avoid paying their fair share of taxes in their countries of origin. They take advantage of tax conventions because of globalization or international tax competition. Over the past 10 years, it has become possible to transfer money electronically.
However, under Bill S-17, if ordinary citizens find that they are already paying a lot of taxes and hope to be able to take advantage of tax havens as well, it is illegal for them. In their case, the government takes all the necessary measures to prevent them from doing so. During these meetings, we are wondering whether this is necessary or sufficient and whether it will really work, but those are just sub-questions.
Actually, the first question to ask ourselves is whether we want a global tax system that encourages companies and very wealthy individuals and that enables them to have legal access to tax havens or to do business with countries where the tax rates are much lower than in Canada. Second, we must ask ourselves whether we want to prevent ordinary citizens from doing it.
Conservative
The Chair Conservative James Rajotte
Merci, Madame.
Thank you.
Unfortunately, Mr. Rankin, your round is up. You'll have to return to your questions next time.
I would just reiterate, colleagues, that we have five minutes, so please direct your question to one witness. If you have time you can follow up with a second.
We'll go to Mr. Adler.
Conservative
Mark Adler Conservative York Centre, ON
Thank you, Chair.
Thank you to all the witnesses for being here today.
I want to begin with Mr. Rosenbloom if I may.
Mr. Rosenbloom, the last time you were here before the committee during our study on tax evasion you spoke about the importance of rules and taking action to prevent tax evasion and create tax fairness. Specifically you said, “This is a rule-based system. This isn't just a lot of concepts and research: we have to have rules”.
With the legislation before us today, we are taking action. Do you think these tax treaties are a step in the right direction, in the fight against tax evasion?
Caplin and Drysdale, New York University, School of Law, As an Individual
I don't think you can look to treaties as a primary tool in the fight against tax evasion, because the function of a tax treaty is basically to relieve taxation. In the United States it's a constitutional matter that you can't use a treaty to increase taxation. To look to a treaty to solve the problem, at least at the corporate level, I think is just looking in the wrong place.
As I indicated in my statement, I am also really skeptical about whether the exchange of information provisions in the treaties—which I don't object to in principle—are capable of addressing the problem of mass evasion at the individual level, and certainly not at the corporate level. I don't think that problem at the corporate level is an absence of information; I think it's a failure throughout the world to adopt coordinated rules to address the problem. Frankly I have real doubts as to whether there's political will anywhere to take the measures that are necessary.
So my general feeling is that looking to the treaties to solve this problem is just not looking in the right place.
Caplin and Drysdale, New York University, School of Law, As an Individual
Treaties are there to address double-taxation. That's their principal function. For me, the main reason that a treaty exists is that it establishes an international dispute-resolution mechanism to resolve cross-border disputes. Because we don't have a world tax court, we need to have some method of resolving cross-border disputes. Treaties create that mechanism; nobody has mentioned that yet today. That's the value of a treaty to a taxpayer.
Caplin and Drysdale, New York University, School of Law, As an Individual
You need treaties because you don't want double taxation, but they're not going to solve the tax-haven problem.
Conservative
Mark Adler Conservative York Centre, ON
In your last appearance you also stated:
...I have always admired, insofar as I understand it, the Canadian system. It does seem to be a lot better from a policy standpoint, and I've participated in various policy discussions in Canada about the Canadian system.
I was wondering if you could elaborate somewhat on those comments, and more specifically if you think the measures contained within the bill we're examining today are in line with the positive policy standpoint you see coming out of Canada.
Caplin and Drysdale, New York University, School of Law, As an Individual
From my vantage point, which is of course from the United States and not Canada, I don't have much objection to any of these six agreements, frankly. The two information exchange agreements are broadly consistent with what's in the OECD. The ones with Namibia and Serbia are pretty routine, I think.
From a U.S. perspective I would probably have some difficulties with the ones with Poland and Hong Kong, particularly Hong Kong, but I think Canada's policies are different from those of the United States. The way you would approach treaties is more defensive than we do, so you probably don't have the same problems we have with inbound investment into Canada.
I am an admirer of the Canadian system. I think the Canadian tax system, frankly, is as intelligent a system as I've seen throughout the world in terms of putting together domestic law. But this is not a subject of domestic law today; what you have before you are international agreements. That's the frosting on the cake. Where the action is in the world today is in the domestic laws of the various countries. That's where action needs to be taken, if it's going to be taken, not through the treaties. You cannot look to the treaties to resolve the problems that exist.
Conservative
Mark Adler Conservative York Centre, ON
Would you agree that the treaties we're examining today do protect our tax base?
Caplin and Drysdale, New York University, School of Law, As an Individual
The treaties you're examining today basically relieve both excess taxation and, to some extent, double taxation, while protecting the Canadian tax base on inbound investment from abroad. I don't think these treaties have much to do with outbound investment from Canada.
Treaties are focused on inbound investment, basically. In the United States it's extremely clear that's what they are focused on. Even without the U.S. addition to that, treaties are focused on whether Canada will tax the foreigners investing in Canada. You relieve the taxation, but unlike us, you don't completely relieve it. All of the treaties here have positive rates of withholding on interest, dividends, and royalties, which we do not have. It seems to me that these are defensive documents. From my perspective I don't see any substantial problem with any of them, frankly.
Conservative
Liberal
Ted Hsu Liberal Kingston and the Islands, ON
I have a question for Professor Cockfield on information exchange.
When you came before the committee before, you explained that you were in favour of automatic information exchange, but with some care in implementing it. I was wondering if you could talk about best practices you see in this area in the world. In particular, you mentioned something about an agreement between the United Kingdom and Luxembourg involving automatic information exchange.
I was wondering if you could contrast that agreement with the agreement we're talking about today between Canada and Luxembourg.
Prof. Arthur Cockfield
Thank you.
By way of background, Canada only engages in ongoing automatic information exchange with one other country, the United States. As for how it works, let's say that I'm a Canadian citizen. If I move to New York City and open up a bank account with the Bank of America and that generates interest income, under U.S. law and regulations promulgated pursuant to the Internal Revenue Code—it's called the “qualified intermediary regime”—the bank must collect that information about the income earned. They send it to the IRS, and the IRS subsequently sends it over to the CRA.
My understanding, through informal talks with folks at the CRA in the past, is that this system works for the most part. The trickiness is in matching the source of income with the taxpayer's identification, so the ideal system that people have proposed would involve not only automatic information exchange, but some way to identify me when I registered that bank account with the Bank of America.
Maybe I'd have to give my Canadian taxpayer ID, which is typically our social insurance number, and which is quite controversial. But in any event, then they would have the payment and the taxpayer ID, and a software program, either in the United States or in Canada, could quickly be run to see if I had disclosed that information—the interest income—on my Canadian tax return. That's the system that has been ongoing, and I think it's the most effective system in Canada.
We do engage in automatic information exchanges pursuant to our bilateral tax treaties with other countries on a more limited basis. What has been recently entered into between the U.K. and Luxembourg—I briefly described it—is not without controversy. As I understand it—again, sometimes the colloquial term is “Rubik agreement”—the Luxembourgers have agreed to automatically share, like the U.S. with Canada, but the taxpayer can make a decision and say, “Well, I don't want my information shared with the U.K.” If that's the case, they impose a withholding tax.
Let's say there's $100 of interest income generated by a U.K. resident in Luxembourg. Either that information goes directly to the U.K. government, or the English person investing in Luxembourg would have to retain, say, $40 or €40 of that transfer if they didn't want their information divulged. If they pay the withholding tax—and this is the controversial part—my understanding is that they're completely off the hook. England, the U.K., has agreed not to prosecute that individual. That's quite controversial, because essentially they think that a lot of international drug laundering will shift to Luxembourg as a result.
The Canadian provision with Luxembourg as proposed in this bill does not ever contemplate automatic information exchanges or spontaneous information exchanges. The Luxembourgers presumably insisted on these new procedures, whereby we'd have to give them the name of an individual, a Canadian, say, who we believe is engaged in offshore tax evasion.
That's problematic on a number of levels. Often we just suspect that there's bad activity. We don't know that there's a name. The CBC investigation revealed that there's a new kind of international asset, sometimes referred to as an “ownerless asset”, so you won't actually have that person's name.
Prof. Arthur Cockfield
In any event, to summarize, the best system between Canada and the U.S. is that it's probably not politically feasible, though, to negotiate that with too many other countries, including Luxembourg.
Liberal
Ted Hsu Liberal Kingston and the Islands, ON
Maybe I could just quickly go around to all of the witnesses and ask if they agree—